Momentum: a Practitioner’s Guide

As an investable concept, momentum is straightforward—purchase (avoid) stocks that have performed relatively well (poorly) recently. The period over which returns are evaluated is important for momentum; for example, there is evidence of a one-month reversal effect in stock prices.

The most influential paper on momentum is arguably Mark Carhart’s 1997 study; adding momentum to the Fama-French Three Factor Model increased the model’s explanatory power and showed momentum was a key factor in describing cross-sectional returns.1 After momentum had first been formalized into a systematic investment strategy as part of Dow Theory and following a period in the latter half of the 20th century where there was much debate over its existence and potential origins.2 Carhart’s study meant momentum was incorporated into risk management and active management processes.

The S&P Momentum Indices are rebalanced semiannually after the close of the third Friday of March and September; the reference dates are the last business day of February and August, respectively. As of the rebalance reference dates, momentum is calculated using 12 months of data beginning 13 months prior, ensuring the one-month reversal effect is avoided. The momentum scores for each security are adjusted for risk to account for the standard deviation of daily price returns over the period that is used to calculate the unadjusted momentum values. For more information regarding the calculation of the S&P Momentum Indices, please see the S&P Momentum Indices Methodology.